Hagerty, Inc. — Q1 2023 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2023, compared with Q1 2022. Hagerty provides enthusiast-vehicle insurance and related memberships, marketplace, media and events. Its insurance operations include an MGA business and Hagerty Re. Broad Arrow, acquired in August 2022, is consolidated in Q1 2023, affecting year-over-year comparability.
Unless otherwise noted, amounts are U.S. dollars. Financial statement amounts are in millions; figures may not sum due to rounding.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Total revenue | $218.4 | $167.8 | Up 30.1% |
| Commission and fee revenue | $74.6 | $62.5 | Up 19.5% |
| Earned premium | $117.2 | $89.1 | Up 31.5%; higher assumed premium and U.S. quota share |
| Membership, marketplace and other revenue | $26.5 | $16.2 | Up 63.5%; includes Broad Arrow marketplace activity |
| Operating loss | $(16.5) | $(13.0) | Loss widened by $3.5 |
| Consolidated net income (loss) | $(15.0) | $15.9 | Year-over-year decline substantially reflects the prior-year warrant fair-value gain |
| Net income (loss) attributable to controlling interest | $(2.1) | $27.5 | Basic and diluted EPS: $(0.03) vs. $0.33 basic |
| Adjusted EBITDA (non-GAAP) | $6.7 | $(6.0) | Improved by $12.7 |
| Operating cash flow | $11.7 | $9.0 | Up $2.7 |
| Cash and cash equivalents | $63.4 | — | At March 31, 2023; restricted cash was an additional $444.0 |
| Total debt | $89.0 | $108.3 at Dec. 31, 2022 | Credit facility $84.6; notes payable $4.5 |
Insurance and scale indicators. Total written premium was $182.9 million, up 18.1%; Hagerty Re loss ratio was 41.3%, versus 41.4%. New insurance business count rose to 51,762 from 47,514. Policies in force increased to 1,335,008 from 1,315,977 at year-end 2022; retention was 87.9% versus 88.0%. HDC paid members totaled 767,872, up from 752,754, and NPS remained 83.
Liquidity and debt. Cash, cash equivalents and restricted cash totaled $507.4 million at quarter-end, but $444.0 million was restricted. The $230 million revolving credit facility had $84.6 million outstanding, matures in October 2026, and bore a 7.16% weighted-average borrowing rate for the quarter. Hagerty reported compliance with its financial covenants. Cash used in investing activities was $24.8 million, including $8.1 million for property, equipment and software and $7.8 million in new Broad Arrow loans; financing cash outflow was $18.9 million.
Material changes and drivers
- Revenue growth reflected insurance policy and premium growth, higher U.S. reinsurance participation, membership growth and Broad Arrow marketplace revenue. Broad Arrow contributed approximately $5.8 million of Q1 revenue; because it was acquired in August 2022, reported marketplace growth is not fully comparable with Q1 2022.
- Operating expenses rose 29.9% to $234.8 million, slightly faster than revenue. Salaries and benefits increased 18.8%; depreciation and amortization rose 92.3% to $13.7 million, including a $3.6 million digital-media-content impairment described in MD&A.
- Q1 2023 included $5.5 million of restructuring, impairment and related charges, primarily $5.1 million of severance from a further reduction in force. A separate $0.4 million digital media content write-down is included in the restructuring charge disclosure.
- The warrant-liability fair-value change was a $0.5 million loss in Q1 2023, versus a $31.7 million gain in Q1 2022. This non-operating swing is a major reason reported net income changed year over year; it is excluded from Adjusted EBITDA.
- Interest and other income was $5.6 million, versus $0.7 million of expense, largely due to higher interest income on cash and a $2.6 million reduction in the estimated Tax Receivable Agreement liability. Higher credit-facility interest expense partly offset the benefit.
Outlook, risks and contingencies
- No formal revenue or earnings guidance is provided in the supplied filing text. Management said it expects the 2023 reduction in force, reduced hiring plans and other cost-containment initiatives to generate approximately $20–$25 million of incremental annualized savings.
- Management stated that anticipated liquidity sources should be adequate for short- and long-term commitments and operating needs. Hagerty Re reported approximately $360.7 million in cash and restricted cash and said it met Bermuda regulatory capital requirements. Its ability to distribute dividends is subject to solvency rules and regulatory limits.
- Markel and its affiliates are a significant concentration: the filing says they represented approximately 97% of commission revenue and 97% of earned premium. The filing also reports 97% of commission revenue and 96% of due-to-insurer liabilities associated with Markel affiliates. Disruption to these relationships could materially affect results.
- Other principal exposures include claims frequency and severity, reserving estimates, reliance on carrier and reinsurance partners, technology and cybersecurity disruption, competition, economic and insurance-cycle conditions, interest-rate exposure, and the value of collector-car collateral backing Broad Arrow loans. The company targets loan-to-value ratios of 65% or less; its aggregate ratio was 48.1% at quarter-end.
- Hagerty Re remains liable to ceding carriers if its reinsurers fail to perform. The filing says its reinsurers had an A.M. Best rating of A- or better or fully collateralized their maximum obligation. Ordinary-course litigation was not expected by management to have a material adverse effect; no material change to previously disclosed risk factors was reported.
- The company recorded a $3.7 million income tax expense despite a consolidated pretax loss, reflecting its tax structure and income at taxable subsidiaries. Future Tax Receivable Agreement payments could be substantial but are not due until taxable income produces cash tax savings.
Important facts for investors to verify
- How much reported growth reflects underlying insurance and membership expansion versus the consolidation of Broad Arrow and changes in reinsurance quota shares.
- Whether the $20–$25 million expected annualized savings are achieved, and how restructuring and other costs affect profitability and cash flow.
- Markel relationship terms and concentration, including the implications of related-party arrangements and changes in reinsurance participation.
- The accessibility and intended use of restricted cash, along with credit-facility borrowings, variable-rate exposure, covenant headroom and debt repayment needs.
- Loss-reserve development, claims experience and catastrophe protection; the filing’s loss ratio is an operating indicator, not a guarantee of future underwriting results.
- Broad Arrow loan portfolio quality and collateral values, and the outlook for marketplace revenue following its acquisition.
- The effects of warrant fair-value volatility, non-controlling interests, the Tax Receivable Agreement and deferred-tax valuation allowances on reported earnings and cash obligations.